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Equity analysis: Research revolution continues as roles keep changing

About a third of sell-side analysts could lose their jobs over the next two years as fund managers do more of their own research and independent providers gain market share.

Buy-side firms are expected to cut the amount of money they allocate to brokerage research by 24% over the next two years, according to a recent report by financial services consultancy Tabb Group.

The amount spent on brokerage research by buy-side firms in the US and the UK is expected to fall from $5.6 billion in 2006 to $4.25 billion in 2008. Spending on independent research in the same period, by contrast, is expected to rise from $1.49 billion to $1.78 billion.

Hard hit

The massive fall in revenues will hit investment banks’ research departments hard.

“We estimate that the number of sell-side analysts, roughly 16,200 in 2000, and currently about 9,300, will fall to 6,000 by 2008,” says Jeromee Johnson, a senior analyst at Tabb and author of the report. “Over the next two years the equity research business model will drastically change as buy-side and independent research firms will take over from sell-side firms in the majority of research production.”

Number-crunching In decline
Estimate of sell-side analysts in the US and UK
Source: Tabb Group

Research budgets at investment banks are also being hurt by the decline in overall commission rates and by a growing trend among buy-side firms to direct agency portfolio trades to brokers as compensation for equity research.

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